KCAP Settles Charges of Overstating Assets During Crisis

By Brendan Conway

Regulators are keeping closer watch on how asset managers value what they hold. Case in point: KCAP Financial (KCAP) today settled charges that it overstated the value of certain assets during the financial crisis.

This is the first Securities and Exchange Commission enforcement action against a public company under the accounting rule known as Financial Accounting Standard 157, which requires assets to be valued with reference to today’s market price.

KCAP, a business development company, was accused of valuing debt securities and certain collateralized debt obligations using “an enterprise value methodology.” FAS 157, which came into effect in 2008, “requires assets to be fair valued based on an ‘exit price’ that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date,” according to the SEC.

The firm was accused of valuing certain assets at cost even though it said it had used a discounted cash flow model incorporating a variety of relevant factors, according to the order. Regulators claim the effect was to overstate KCAP’s net asset value by 27% for 2008. The numbers were restated in 2010.

KCAP and three executives neither admitted nor denied the charges, according to an SEC release. President and President and CEO Dayl W. Pearson said in in a release that the company is “pleased that this settlement allows us to put this legacy issue behind us.”

Pearson and former CFO Michael I. Wirth agreed to pay $50,000 penalties and CIO R. Jonathan Corless agreed to pay a $25,000 penalty, according to the SEC release.

KCAP’s shares are down by 1.6% on Wednesday as major indexes rise by half a percent or so.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.